Select your language

Suggested languages for you:
Log In Start studying!
StudySmarter - The all-in-one study app.
4.8 • +11k Ratings
More than 3 Million Downloads
Free
|
|

All-in-one learning app

  • Flashcards
  • NotesNotes
  • ExplanationsExplanations
  • Study Planner
  • Textbook solutions
Start studying

Macroeconomic indicators

Save Save
Print Print
Edit Edit
Sign up to use all features for free. Sign up now
Economics

Macroeconomic indicators are essential for understanding how a country’s economy is performing. It’s always useful to keep an eye out on indices as they help us understand the output of an economy and the effectiveness of economic policies. Let’s learn more about how we can evaluate performance and growth.

Performance indicators are important tools for policymakers that help them understand the performance of the economy. They provide information on the success or failure of the various policies implemented (like fiscal and monetary policy).

The size of the national budget deficit is a good indicator of how well fiscal policy is performing.

Performance indicators are also useful for analysing whether current policies are on track to achieve certain economic objectives which were set before implementing the policy.

Types of macroeconomic indicators

There are two types of macroeconomic performance indicators: lead and lag indicators.

Lead indicators

Lead indicators look towards the future. These tend to predict the future state and future changes in the economy. Lead indicators are based on current expectations about the future.

If the economic cycle is experiencing the beginning of a recession, investments will start decreasing due to lower share prices and low levels of confidence in the economy. This may also lead to low levels of consumer confidence and therefore a fall in consumer spending. As a result, due to the uncertain economic environment, we may infer that levels of aggregate demand are likely to fall in the near future.

Lag indicators

Lag indicators look towards the past performance of the economy. They are metrics that tend to have a late reaction to economic changes and therefore provide information on past and current economic events.

Information about real GDP or GDP growth rates are forms of lag indicators, as they provide information on the current and past state of the macroeconomy.

Unemployment is another form of a lag indicator. It might take firms some time to react to a decrease in output by laying off workers. Workers might have protection through contracts and labour unions, meaning they do not lose their jobs right away.

Index numbers as macroeconomic indicators

Index numbers are important performance indicators to use when evaluating the macroeconomy. They provide a basis for comparison and performance analysis.

An index starts in a certain year, which is known as the base year. The base year is given the index number value of 100. The base year is also the starting point of comparison for both future and past years. Setting the base year to 100 is useful because in future years the size of the variable is likely to change (either increase or decrease) and it makes it easier to compare values based on percentages when the starting point is 100. A percentage increase will cause the index number to exceed 100, whereas the percentage decrease will lead to a fall below 100.

As we know, the base year’s index number is 100. In the following year, the index number is equal to 110. This would signify a 10% increase from the base year. Similarly, if the index number changes to 90 in the following year, it signifies a 10% decrease from the base year.

Calculating and interpreting index numbers

Now, let's take a look at some specific examples of index numbers and how to calculate and interpret them.

The GDP deflator is a variable we can use to calculate real GDP from nominal GDP (by dividing nominal GDP by the price deflator). Real GDP measures the total output of goods and services produced in an economy over time, taking into account inflation and price changes. In the macroeconomic context, it is important to look at real values as it provides more objective insights.

The GDP deflator is a price index that measures average prices in one period relative to another period, the base year.

The consumer price index (CPI) is also an example of an index number. This price index measures the costs of living by creating a general basket of goods and services. The price (value) of the same basket of goods and services is then compared between the current year and a base year. This can be used to measure inflation and deflation. A positive change, like 110 compared to 100 (base year) indicates inflation. A negative change, like 95 compared to 100 (base year) indicates deflation.

Let’s take a look at consumer price inflation for coffee. We can see that the base year for this index is 2015 (= 100). The value of this index in 2020 is 103.6. Compared to the base year, we can conclude that the price of coffee has increased by 3.6%.

Macroeconomic indicators, calculating and interpreting index numbers, CPI for coffee UK, StudySmarterFigure 1. CPI Index for Coffee 2015-2020. Source: UK Office for National Statistics, ons.gov.uk - StudySmarter.

The producer price index (PPI) is a compilation of multiple price indices to understand changes in price during the production process. There are different PPIs for inputs, outputs, and intermediate goods, which measure changes in price.

Economists can also make indices for other macroeconomic factors such as affordable housing indices, labor productivity indices, or currency indices.

Let’s take a look at the labour productivity of the UK’s entire economy.

Macroeconomic Indicators, Calculating and Interpreting Index Numbers, UK economy output / hours worked, StudySmarterFigure 2. UK’s whole economy output per hours worked 2010-2020. Source UK Office for National Statistics, ons.gov.uk - StudySmarter.

In 2020, the total output per hour worked increased by 0.8% (2020 = 100.8) compared to the base year (2019 = 100).

On the other hand, output per hour worked was 4% lower (2014 = 96) in 2014 compared to the base year.

It is, however, important to note that an increase or decrease in the index number is not equal to a similar percentage change when comparisons are made between years other than the base year.

Let’s say we wanted to compare the changes in labour productivity between 2014 and 2017. Labour productivity increased by approximately 3 points (from 96 in 2014 to approximately 99 in 2017). This does not signify a 3% increase as the year of comparison is not the base year. How can we calculate the percentage change between these two years?

As a result, rather than a 3% increase, there was actually a 3.13% increase in labour productivity between 2014 and 2017.

Therefore, you can’t use index numbers on their own in absolute terms. However, they do allow for relative comparison.

The national income data as a macroeconomic indicator

National income monitors the flow of the output of goods and services in the national economy. To create the flow of national income, the economy needs to have a stock of capital goods and human capital, in addition to various factors of production such as land and resources.

The national wealth includes all physical assets owned by residents as well as capital stock. Capital stock includes both capital goods (except for consumer goods) and social capital owned by the government. Capital stock excludes consumer goods, although these are part of the national wealth.

It is also important not to confuse wealth, which is a stock, with income, which is a flow.

The issue with capital stock is that it eventually deteriorates. This deterioration is known as depreciation, which results due to consumption. In order to keep the size of capital stock to be able to produce as much as in the previous years, it needs to be replaced.

If no investment is made in replacing capital goods, capital stock shrinks and economic growth decreases. For positive economic growth to occur, an investment beyond replacement investment has to occur.

It is important to distinguish between gross domestic product (GDP) and gross national income (GNI). GDP measures the flow of output produced within the economy, whereas GNI takes into consideration the flow of income coming in and leaving the country. This makes GNI more representative (a better indicator) of the income available to spend in the country’s current economy.

Comparing living standards and national income data as macroeconomic indicators

National income statistics can be used to compare countries’ economic performance based on macroeconomic indicators.

The total output of a country can be used as an indicator of how well the country’s economy is performing. An economy that is growing at a sustained rate, in other words, its output is increasing sustainably, is considered to be performing well. Such economic growth might increase living standards. As a result, national income data can be used to compare living standards between different countries and to assess changes in living standards over the course of several years.

The GNI can be used as an indicator to measure economic growth. An increase in GNI could indicate economic prosperity and rising standards of living. However, it is also important to assess additional indices, as increased GNI could also mean that the distribution of wealth in society is less equitable.

Beyond the fact that national income data may not provide insights on the distribution of wealth in society, other problems with using national income data to compare living standards include:

  • Quality: over time, the quality of goods and services in an economy may increase or decrease. A decrease in the goods’ quality is not taken into consideration when using income data for comparisons, although it may well lower living standards.

  • Exchange rates: exchange rates might be incorrectly valued. As a result, the comparison between two countries might be slightly distorted.

  • Hidden economy: the hidden economy represents all transactions in an economy that are not recorded, as they are illegal. These transactions are not included in national income data.

  • Non-monetary production: certain activities like housework, which is a form of productivity, are not part of national income data as they do not have a monetary value (no money is exchanged for the activity). Such omissions may lead to the underestimation of economic activity.

Macroeconomic Indicators - Key takeaways

  • Performance indicators are important tools for policymakers to understand the economy’s performance.
  • Performance indicators are also useful for analysing whether current policies are on track to achieve certain economic objectives which were set before implementing the policy.
  • Lead indicators tend to predict the future state and future changes in the economy.
  • Lag indicators look towards the past and current performance of the economic environment.
  • Index numbers are important economic metrics (performance indicators) to use when evaluating the macroeconomy.
  • An index starts in a certain year, which is known as the base year. The base year is given the index number value of 100.
  • Some examples of index metrics are:
    • Consumer price index.
    • GDP deflator.
    • Producer price index.
    • Labour productivity index.
  • National income monitors the flow of the output of goods and services in the national economy.
  • National income data can be used to compare living standards between different countries and to assess changes in living standards over the course of several years.

Macroeconomic indicators

There are two main macroeconomic indicators: lag and lead indicators. Lead indicators look towards the future. These tend to predict the future state and future changes in the economy. Lag indicators are metrics that tend to have a late reaction to economic changes and therefore provide information on past and current economic events.

GDP Deflator, Consumer Price Index, Producer Price Index, National Income.

Final Macroeconomic indicators Quiz

Question

What is Gross Domestic Product?

Show answer

Answer

Gross domestic product (GDP) is the total economic activity (total output or total income) in a country's economy.

Show question

Question

There are ____ ways of measuring GDP.

Show answer

Answer

3

Show question

Question

What are the three ways of measuring GDP?

Show answer

Answer

Expenditure, income and output.

Show question

Question

Explain the output approach of measuring GDP.

Show answer

Answer

This approach includes adding up the total value of final goods and services produced in a country's economy over a period of time.


Show question

Question

Explain the expenditure approach of measuring GDP.

Show answer

Answer

This approach includes adding up all spending in a country's economy over a period of time (usually one year).

Show question

Question

What is nominal GDP?

Show answer

Answer

Nominal GDP is the measure of GDP, or total economic activity, at current market prices. It measures the value of all goods and services produced in the economy in terms of the prices that currently exist in the economy.

Show question

Question

How is nominal GDP calculated?

Show answer

Answer

Nominal GDP = C + I + G + (X - M)

Show question

Question

What does real GDP measure?

Show answer

Answer

Real GDP measures the value of all goods and services produced in the economy while considering price changes or inflation.

Show question

Question

Why is it important to consider real GDP values?

Show answer

Answer

In an economy, prices are likely to change over time. When comparing data over time, it is important to look at real values in order to gain more objective insight.

Show question

Question

What is GDP per capita?

Show answer

Answer

GDP per capita measures a country’s GDP per person.

Show question

Question

How can we calculate GDP per capita?

Show answer

Answer

IBy taking the total value of GDP in the economy and dividing it by the country's population.

Show question

Question

How can we calculate GNP?

Show answer

Answer

GNP = GDP + Net income from abroad

Show question

Question

How could you define economic growth?

Show answer

Answer

Economic growth is the sustained increase in the output of the economy over a certain period of time, usually one year.

Show question

Question

How can we calculate GDP growth rates?

Show answer

Answer

By looking at the percentage increase or decreases in GDP between two different years.

Show question

Question

What is a PPP exchange rate?

Show answer

Answer

A PPP exchange rate is an exchange rate between currencies that equalises the buying power of a country's currency to the USD.

Show question

Question

What are macroeconomic performance indicators?

Show answer

Answer

They are indicators that provide essential information to policymakers about the outcomes of a particular type of government policy.

Show question

Question

Name an example of a performance indicator that could be used to evaluate the effectiveness of fiscal policy.

Show answer

Answer

The size of the budget deficit.

Show question

Question

What are the two main types of macroeconomic performance indicators?

Show answer

Answer

Lead and lag indicators.

Show question

Question

Lead indicators look at the ______ state of the economy.

Show answer

Answer

future

Show question

Question

Outline an example of a lead indicator.

Show answer

Answer

If the economic cycle is experiencing the beginning of a recession, investment will start decreasing due to lower share prices and low levels of confidence in the economy. This may also lead to low levels of consumer confidence and therefore a fall in consumer spending. As a result, due to the uncertain economic environment, we may infer that levels of aggregate demand are likely to fall in the near future.

Show question

Question

What is a lag indicator?

Show answer

Answer

Lag indicators look towards the past performance of the economic environment. They are metrics that tend to have a late reaction to economic changes and therefore provide information on past and current economic events.

Show question

Question

Name an example of a lag indicator.

Show answer

Answer

Information about real GDP or GDP growth rates are forms of lag indicators, as they provide information on the current and past state of the macroeconomy.

Show question

Question

What is an index number?

Show answer

Answer

A macroeconomic metric.

Show question

Question

What are index numbers used for?

Show answer

Answer

Comparison and performance analysis.

Show question

Question

What is a base year (index numbers)?

Show answer

Answer

The starting year of the index.

Show question

Question

What is the value given to the base year?

Show answer

Answer

100

Show question

Question

If 2019 is the base year and in 2020 the value of this index is 104.6, what can we infer?

Show answer

Answer

We can infer a 4.6% increase from the base year.

Show question

Question

If a certain measurement has experienced a 7% decrease from the base year. What would the value of the index be in the current year?

Show answer

Answer

93

Show question

Question

Name two examples of indices.

Show answer

Answer

GDP deflator and consumer price index.

Show question

Question

What is national income?

Show answer

Answer

National income is the monetary value of the output of goods and services produced in the economy.

Show question

Question

What happens if no investment is made in replacing capital goods?

Show answer

Answer

The capital stock shrinks and economic growth decreases.

Show question

Question

What is the difference between economic growth and economic development?

Show answer

Answer

Economic growth reflects quantitative changes in a country's economy, such as growth of national income or per capita income. For example, an increase in GDP and GNI per capita. 


Economic development is concerned with the standard of living of the people and freedoms available to them as citizens. It considers factors such as changes in income, economic investments and access to healthcare.

Show question

Question

Which of the following is not considered in calculating HDI?

Show answer

Answer

Happiness

Show question

Question

What is inflation?

Show answer

Answer

Inflation is the situation when the general price levels of goods and services increase and the value of money decreases in the economy. As a result of inflation, one may require more money to buy goods or services compared to what one would have paid in the past. Basically, it means that the same amount of money can now get you fewer units of a good or service than before.

Show question

Question

What is deflation?

Show answer

Answer

When the prices of goods and services go down in the economy and the comparative value of money increases

Show question

Question

As a result of inflation, one may require less currency to buy goods or services compared to what they would pay in the past.


Show answer

Answer

False

Show question

Question

What is cost-push inflation?


Show answer

Answer

Cost-push inflation occurs when the cost of production increases. This results in an increase in the final price of goods and services.

Show question

Question

What is demand-pull inflation?

Show answer

Answer

Demand-pull inflation occurs when there is a high demand for goods and services but not enough aggregate supply. When aggregate supply and aggregate demand for goods and services don't match, there is a rise in the price of those goods and services. 

Show question

Question

What is the formula to calculate CPI?


Show answer

Answer

CPI = Cost of the market basket in the given year X 100

Cost of the market basket in the base year 

Show question

Question

What are the three most commonly used methods to measure the inflation rate?

Show answer

Answer

RPI - Retail Price Index

CPI - Consumer Price Index

WPI - Wholesale Price Index.


Show question

Question

RPI is calculated using a geometric mean.


Show answer

Answer

False

Show question

Question

CPI is calculated using a geometric mean.

Show answer

Answer

True

Show question

Question

How many baskets of goods and services are formed in the UK to calculate using CPI?

Show answer

Answer

700

Show question

Question

 How can controlling budget help reduce inflation?


Show answer

Answer

Governments aim to spend less compared to the revenue generated which helps them to create a surplus. This also helps the government to reduce the deficit financing.

Show question

Question

Increasing production helps to reduce inflation.


Show answer

Answer

True

Show question

Question

All countries use the same method to measure inflation.


Show answer

Answer

False

Show question

Question

What are the eight categories in which goods and services are divided under the CPI measure?


Show answer

Answer

Housing, apparel, transportation, medical, recreation, food and beverages, education and other goods and services.

Show question

Question

The increase in interest rates reduces demand resulting in low economic growth and finally reducing demand-pull inflation.


Show answer

Answer

True

Show question

Question

Define unemployment.

Show answer

Answer

Unemployment refers to the state of being unemployed. This refers to those who are willing and able to work at the going wage but cannot find a job despite actively searching for it.

Show question

Question

How does unemployment differ from unemployment rate?

Show answer

Answer

Unemployment rate differs from unemployment itself as it is a percentage of the labour force who are unemployed. 

Show question

60%

of the users don't pass the Macroeconomic indicators quiz! Will you pass the quiz?

Start Quiz

Discover the right content for your subjects

No need to cheat if you have everything you need to succeed! Packed into one app!

Study Plan

Be perfectly prepared on time with an individual plan.

Quizzes

Test your knowledge with gamified quizzes.

Flashcards

Create and find flashcards in record time.

Notes

Create beautiful notes faster than ever before.

Study Sets

Have all your study materials in one place.

Documents

Upload unlimited documents and save them online.

Study Analytics

Identify your study strength and weaknesses.

Weekly Goals

Set individual study goals and earn points reaching them.

Smart Reminders

Stop procrastinating with our study reminders.

Rewards

Earn points, unlock badges and level up while studying.

Magic Marker

Create flashcards in notes completely automatically.

Smart Formatting

Create the most beautiful study materials using our templates.

Sign up to highlight and take notes. It’s 100% free.